Family security is considering introducing tiny GPS trackers that can be inserte

Question

Family security is considering introducing tiny GPS trackers that can be inserted in the sole of a child's shoe, which would then allow for the tracking of that child if he or she was ever lost or abducted. The estimates, that might be off by 10% associated with this new product are shown here:

unit price ($)    125    

variable cost ($)           75      

fixed cost ($)   250000          

expected sales (per year)         10000

estimate above or below by %            10      

intial outlay (million Dollars) 1          1000000

number of years          10      

required rate of return (%)      10      

marginal tax rate         34      

since this is new product line, you are not confident in your estimates and would like to know how will you will fare if your estimates on the items listed above as 10% higher or 10% lower than expected. Assume that this new product line will require an initial outlay of $ 1.00 million, with no working captial investment, and will last for 10 years, being depreciated down to zero using straight-line description. In addition,the firm's required rate of return or cost of capital is 10.0 %, and the firm's marginal tax rate is 34%.

Calculate the projects NPV under the "best case scenario" (that is use the high estimates unit price 10% above expected, variable costs 10% less than expected, fixed costs 10% less than expected, and expected sales 10% more than expected).

Calculate the Project's NPV under the "worst-case scenario".

Explanation / Answer

Calculation of NPV under best case scenario 0 1 2 3 4 5 6 7 8 9 10 Initial Outlay -1000000 Sales 1512500 1512500 1512500 1512500 1512500 1512500 1512500 1512500 1512500 1512500 Variable Cost -742500 -742500 -742500 -742500 -742500 -742500 -742500 -742500 -742500 -742500 Fixed Cost -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 -225000 Depreciation -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 Profit 445000 445000 445000 445000 445000 445000 445000 445000 445000 445000 Tax @ 34% -151300 -151300 -151300 -151300 -151300 -151300 -151300 -151300 -151300 -151300 Cash Flows 293700 293700 293700 293700 293700 293700 293700 293700 293700 293700 Depreciation 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Net Cash Flows -1000000 393700 393700 393700 393700 393700 393700 393700 393700 393700 393700 PVF@10% 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 PV of Cash Flows -1000000 357873.3 325196.2 295668.7 268897.1 244487.7 222046.8 201968.1 183857.9 166928.8 151968.2 NPV 1418893 Calculation of NPV under Worst Case scenario 0 1 2 3 4 5 6 7 8 9 10 Initial Outlay -1000000 Sales 1012500 1012500 1012500 1012500 1012500 1012500 1012500 1012500 1012500 1012500 Variable Cost -742500 -742500 -742500 -742500 -742500 -742500 -742500 -742500 -742500 -742500 Fixed Cost -275000 -275000 -275000 -275000 -275000 -275000 -275000 -275000 -275000 -275000 Depreciation -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 Profit -105000 -105000 -105000 -105000 -105000 -105000 -105000 -105000 -105000 -105000 Tax @ 34% 0 0 0 0 0 0 0 0 0 0 Cash Flows -105000 -105000 -105000 -105000 -105000 -105000 -105000 -105000 -105000 -105000 Depreciation 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 Net Cash Flows -1000000 -5000 -5000 -5000 -5000 -5000 -5000 -5000 -5000 -5000 -5000 PVF@10% 1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 PV of Cash Flows -1000000 -4545 -4130 -3755 -3415 -3105 -2820 -2565 -2335 -2120 -1930 NPV -1030720

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